Bertelsmann's Net Income Plunges

Plans Are Made to Shed
U.S. Direct-Sales Unit;
A Broader Overhaul?

By

Mike Esterl

Updated March 19, 2008 12:01 am ET

FRANKFURT -- Bertelsmann AG plans to sell its U.S. book, music and DVD clubs in what could be the first step of a broader overhaul at Europe's largest media company after hefty impairment charges battered its bottom line.

The disposal of the U.S. clubs unit, which rang up a bit less than $1.5 billion in revenue last year, represents the first big strategic move by
Hartmut Ostrowski
since he became chief executive of the privately held German conglomerate in January. The 50-year-old Mr. Ostrowski, a company veteran, hasn't ruled out other divestments as management grapples with shrinking sales and limited financial wiggle room.

Bertelsmann, whose media holdings include book publisher Random House, television broadcaster RTL and a 50% stake in recorded-music company Sony BMG Music Entertainment, said yesterday that revenue last year dropped 2.8% to &euro;18.76 billion ($29.5 billion). It was dragged down in part by a weaker U.S. dollar and the sale of its music-publishing business.

Net income plunged to &euro;216 million from &euro;2.14 billion as the company booked &euro;854 million in net charges -- including &euro;414 million of impairment and restructuring costs tied to the U.S. clubs. Net income in 2006 was boosted by a &euro;1.17 billion capital gain from the music-publishing sale.

The U.S. divestment plan marks a reversal for Bertelsmann, which acquired Columbia House's music and DVD clubs in 2005 for about $400 million to become the U.S. market leader. It shelled out about $150 million last year to buy Time Inc.'s 50% interest in Bookspan, a book-club joint venture that includes Book-of-the-Month Club, leaving Bertelsmann as the only major operator of book, music and DVD clubs in the U.S.

Revenue at Bertelsmann's U.S. clubs fell a bit more than 10% last year, according to a person familiar with the matter, and memberships have fallen to around 13 million customers from roughly 16 million three years ago. Membership clubs, which traditionally require clients to make one- or two-year commitments, have become an increasingly hard sell amid stiff competition from Internet retailers and mass merchants.

Bertelsmann has hired investment bank Morgan Stanley to try to find a buyer for the unit. The sale process should begin "in the coming weeks,"
Peter Olson,
a board member, said at a news conference in Berlin.

Mr. Ostrowski said that Bertelsmann was conducting a strategic review of its entire Direct Group division, which houses book, movie and DVD clubs in roughly 20 countries. Revenue at the unit dropped 4.1% to &euro;2.56 billion last year, and operating profit plunged to &euro;10 million from &euro;110 million.

"The situation of the Direct Group is not satisfactory," said Mr. Ostrowski at the news conference, adding that an eventual sale of the entire division couldn't be ruled out.

Industry speculation has been rife for some time that Bertelsmann might try to exit from Sony BMG, the recorded-music joint venture with Japan's
Sony Corp.
that was formed in 2004 but has since been buffeted by an industrywide collapse in CD sales.

Revenue at Bertelsmann's BMG music division fell 28% to &euro;1.46 billion last year, and operating profit was nearly halved to &euro;93 million.

Mr. Ostrowski noted that no changes to the ownership structure of Sony BMG can be made until next year, when the joint venture's lock-up period expires. At that time, a decision will be made on whether Bertelsmann acquires Sony's stake or vice versa, or if the joint venture continues in its current form. "All three options are possible," said Mr. Ostrowski.

In recent years, Bertelsmann increasingly has relied on RTL, Europe's largest broadcaster, and its services division Arvato to fuel growth. Together, the two divisions generate a bit more than half of the company's revenue and at least two-thirds of operating profit.

Bertelsmann has had less room to maneuver financially since 2006, when Germany's Mohn family bought out a large minority investor for &euro;4.5 billion to keep the company from going public and increased its stake to 100%.Mr. Ostrowski said Bertelsmann expects to have more than &euro;5 billion available for acquisitions over the next five years, with some money likely to be directed at education services. He added that such funds will have to be derived from profits or divestments. "This year our financial leeway is still somewhat limited for acquisitions," he said.

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